I don’t know if karma is the right word. And comeuppance doesn’t quite work either, as that suggests homebuyers are somehow at fault for dynamics they didn’t create.
Whatever the case, the US housing market “faces an inflection point.” And do note the quotation marks. Readers can’t blame me for overdramatizing the situation. Not this time. That’s a verbatim quote from NAHB Chief Economist Robert Dietz, who on Monday said “an unexpectedly quick rise in interest rates, rising home prices and escalating material costs have significantly decreased housing affordability conditions, particularly in the crucial entry-level market.”
His remarks came alongside a fourth consecutive monthly drop on the NAHB/Wells Fargo Index of builder sentiment, which now sits at a seven-month low (figure below).
77 isn’t a disastrous print by any stretch, and indeed it was near the high-end of estimates from 28 economists. The point isn’t to suggest the market is collapsing. Rather, the point is precisely Dietz’s: This is a critical juncture.
Mortgage rates hit 5% last week. That’s the highest in a decade. Rates are up almost two full percentage points in 2022.
The rapidity of the recent move higher (figure below) suggests would-be buyers are compelled to reassess their options on a weekly basis, assuming they haven’t already locked in their rate.
It’s worth mentioning that tight inventories are no longer sufficient to support elevated levels of buyer traffic. “Despite low existing inventory, builders report sales traffic and current sales conditions have declined to their lowest points since last summer,” NAHB Chairman Jerry Konter said Monday.
The culprit: The dramatic spike in rates and what Konter called “persistent supply chain disruptions,” both of which are “unsettl[ing] the housing market.”
Regular readers might recall that in the third quarter of 2021, investors accounted for a record share of US home sales. According to the latest data from Redfin, that share touched a new all-time high in the fourth quarter at 18.4% (figure below).
Ever higher prices may be vexing for individuals and families, but they’re “one reason why investor demand is stronger than ever,” Redfin economist Sheharyar Bokhari said, in an article originally published in mid-February, but updated earlier this month.
“Investors are chasing rising prices because rental payments are also skyrocketing, incentivizing investors who plan to rent out the homes they buy,” Bokhari went on to write, noting that “the supply shortage is also an advantage for landlords, as many people who can’t find a home to buy are forced to rent instead.”
So, new investor purchases are i) pushing up prices, which serves to inflate the value of previously purchased investment properties, and ii) helping to engineer a supply shortage. Both of those dynamics make it more difficult for regular people to buy, thereby artificially increasing the demand for rentals, which in turn pushes up the amount of rent investors can charge. If that sounds like it should be illegal to you, I’m sorry. It’s just business. It’s just capitalism. And capitalism is what makes America the thriving feudal society it is today.
Last week, the Wall Street Journal said home builders are now “bypassing” individual home buyers altogether in favor of rich investors. “Investors who buy and then rent new homes are fast becoming a favorite customer of the home builder industry,” Will Parker wrote, noting that although “the vast majority of… new homes built last year were sold to individuals and families to live in, rising mortgage rates are making those purchases much more expensive and could lead to a pullback in demand by those traditional buyers.”
Of course, if you’re an investor, you don’t have to worry about rising mortgage rates. Why? Because, as Redfin noted, 75% of the almost $50 billion in homes investors purchased during the fourth quarter “were paid for with all cash.” If you’re paying cash, you don’t need a mortgage. And, as Bokhari wrote, “it’s tough to compete with all-cash offers.”
Why are we buying houses? Because the price of housing is rising. Why is the cost of housing going up? Because we’re buying ’em….